Thursday, 23 February 2017

Article Preview: ‘Credit Rating Agency Regulation in the UK If and When Article 50 is Invoked: Round Holes for a Square Peg?’

This short post previews an article
that this author has had accepted recently by the European Business Law Review,
scheduled for release in 2018. As the issue has just
been raised in the financial press, it is worth going over the central
thesis of the article and discussing some of its applicability to a forthcoming
issue with regards to the regulation of credit rating agencies in the U.K.
after it secedes from the E.U.

The article develops on the basis
that the U.K. will trigger Article 50
and secede from the E.U., and that the terms will be such that the often-stated
notion of a ‘hard-Brexit’ comes to fruition – in such a case, the U.K. will
need to directly regulate the rating industry for the first time, because up
until now the European Securities and Markets Authority (ESMA), i.e. the
European financial regulator, has been tasked with
overseeing the regulation of the industry, with the U.K. having to
designate a ‘competent
authority’ to act as the regional supervisor of the industry within its
jurisdiction. The U.K. has so far designated the Financial Conduct Authority (FCA) as the
competent authority, but this can be seen as a natural progression from the now-defunct
Financial Services Authority’s designation
of that role beforehand. The question the article asks is whether the FCA is
the correct organisation to take on the supervision of the rating industry
full-time after Brexit, if needs be (a so-called ‘soft-Brexit’ may still be negotiated),
or whether there are other agencies within the U.K.’s regulatory framework that
would be better suited.

The article goes on to examine the
strengths and weaknesses of the other major components of the British
regulatory framework, namely the Prudential Regulation Authority (PRA), and the
Financial Reporting Council (FRC), as both have expertise that may be useful in
designing the new framework to be built around the agencies. The PRA has a
number of positive elements in this regard, but the ‘macro’ nature of its mandate mean
that it may have difficulties in monitoring an industry such as the rating
industry with the commitment and expertise it requires. The FRC on the other
hand have direct experience of minutely monitoring an industry similar to the
rating industry, the accounting industry (similar by way of its usage, and
oligopolistic structure). However, the FRC’s track-record is not the best when
it comes to remaining impartial in relation to the industry it is regulating,
and is committed to a joint-effort with the industry, which the article
suggests would be catastrophic with the ratings industry, given its extraordinary
venal nature. Ultimately, the FCA is a good option for the U.K. Government, but
it still has a number of problems which will only be exaggerated if it were to
take sole charge of regulating an industry like the credit rating industry.

The article concludes by looking at
the notion of a specialised ‘office’, which has been discussed in a previous
post in Financial Regulation Matters.
Ultimately, the issue remains that there is a potential of the need to regulate
an incredibly venal industry in a time were the U.K. will be looking to retain
its status as a financial power – it is hard to believe that the U.K.
Government will see increasing
regulations as a way to maintain that position in a world where it is without
the economic support provided by being part of an economic bloc. President
Trump, just days into office, began scything
away at financial regulations, rightly or wrongly, and this is demonstrable
of the new sentiment to have enveloped western Governments – it is starting to
be seen as normal that we should once again fall at the feet of big business
and hope that it does not attack us once more; the often-attributed statement
of Albert Einstein seems particularly apt here:

Insanity:
doing the same thing over and over again and expecting different results.

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